Is Time Running Out For Internet-Only Banks?

While online banks change owners, rates, fees and business models, a debate rages about the viability of the concept of the Internet-only bank.

Recent news, such as CIBC's acquisition of Juniper Bank, provides evidence of the increasing popularity of the brick-and-click combination. Another example is BankOne, Chicago, which recently spiked its high-profile Wingspan.com online bank brand. Wingspan had spent an estimated $100 million to $150 million in its first year of operation.

"The pure Internet model just doesn't work," said analyst Jennifer Schmidt of Meridien Research, who co-authored a research report detailing the advantages held by incumbent banks with branches, brand names and breadth of service offerings. "Traditional banking players launching 'click and brick' have advantage of an established brand name and client base," the report said.

BankOne will add the 225,000 former Wingspan customers to the 900,000 users of its bankone.com site, which is powered by software from Corillian, Portland, Ore. "Former Wingspan customers may, in fact, end up with the same Internet plus brick and mortar access as the bankone.com customers have today," said Stan Lata, a BankOne spokesman. "Why invest the additional money to support an additional brand?"

But although large banks continue to develop or acquire Internet presences, the smaller online players insist that they can compete against the incumbent banks saddled with existing branch networks. "The incumbents are moving the same customer from the branch to probably a combination of branch and Internet," said D.R. Grimes, CEO at Atlanta-based NetBank. "Unfortunately, they got no more deposit dollars in doing that."

Online bankers aren't ready to concede ground on breadth of service offerings for their target markets. NetBank, with over $2 billion in assets, offers a full range of consumer services through its ownership of Market Street Mortgage and through strategic alliances with AmeriVest and Insurance.com.

Similarly, Everbank, an Internet bank based in Stowe, Vt., owns and operates Evertrade Advisors for wealth management and the Evertrade direct brokerage, and also offers insurance products from the online provider InsWeb, Redwood City, Calif.

And through a marketing arrangement with American Skandia-a Shelton, Conn.-based insurance company- Everbank gains access to American Skandia's approximately 50,000 sales agents in the field. Everbank is partially owned by American Skandia and Wilmington Savings Funds Society. "We have a pretty broad range of services, particularly for the consumer market," said Frank Trotter, CEO at Everbank, which has garnered $265 million in deposits in 16,000 customer accounts since launching in January 2000.

Along with diversity of product offerings, most "Internet-only" banks also provide access through numerous channels-everything except for branches. "Call centers and ATMs have been part of NetBank's business model from the beginning," said Grimes.

Therefore, the notion of a pure-play Internet-only bank may be chimerical. Instead of "Internet-only Banks," a better moniker might be "Anything But Branch Banks," or ABBBs. "We don't have a branch system, and as a result we have an operating expense that's roughly half that of a traditional bank," said Grimes.

Yet the growth potential of ABBBs might be limited by the size of the market. "How fast can they grow their deposit bases?" said James Scurlock, senior manager at Cap Gemini Ernst & Young's financial services industry sector. "There's a finite market segment of people who want to accept goods and services in a virtual manner."

Everbank's Trotter conceded that an established institution has an advantage in brand. "We deal with that by providing an excellent level of service with great value."